How Do I Calculate Leverage in 1:25 and 1:100 - Leverage in Forex 1 25 and 1 100
How Leverage Increases Forex Profits & Loses?
If you have a 1,000 dollar account with leverage 100:1 you can buy a maximum of 1 lot which is equal to $100,000 contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 25:1 you can buy a maximum of 0.25 lots which is equal to 25,000 dollars contract(0.25 Standard lots).
Let us calculate profits and losses based on two examples of used leverage, based on $1,000 dollars trading account:
NB: This is the Leverage used not the Maximum leverage, If a online broker gives you 100:1, But if you trade 0.25 contracts then the leverage you will use is 25:1 which isn't equal to Maximum leverage(100:1).
So the example referred in this below is talking of the leverage used based on the volume of the trade which you have opened.
Example 1: (25:1 Leverage or 0.25 Lots)
For 1 lot 1 pip equals $10 dollars
If you make a profit of 100 pips the calculation of profit in dollars is:
0.25 lots
1 pip = $2.5 dollars
100 pips = 100 * 2.5 = $250
Total= balance + profit
= 1000+ 250
= $1,250 you have just made 25% profit your account balance
If you accrue a loss of 20 pips the loss in dollars is
0.25 lots
1 pip = $2.5 dollars
20 pips = 20 * 2.5 = $50
Total= account balance - loss
Total= 1000 - 50
Total = $ 950 you have just lost 5% of your account balance
Example 2: ( 100:1 Leverage )
For 1 lot 1 pip equals $10 dollars
If you make a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $10 dollars
100 pips = 100 * 10 = $1000
Total= balance + profit
= 1000+ 1000
= $2,000 you have just doubled your trading account balance
If you make a loss of 20 pips the loss in dollars is
1 lot
1 pip = $10
20 pips = 20 * 10 = $200 dollars
Total= trading account balance - loss
Total= 1000 - 200
Total = $ 800 you have just lost 20 % of your trading account balance
From the above example you can see that the more leverage you use the greater the profits or losses & less you use the lesser the profit/losses.
It is thenceforth better to use less leverage so that to minimize the risks involved. The higher the leverage option used the higher the risks. This is one of leverage guidelines not to use more than 5:1 leverage ratio.
In trading leverage guide-lines: It is advisable to keep below 10:1 leverage which is still high, most professional money managers use 2:1 meaning they trade only 2 lots for every $100,000 in their account.
To Learn More about Leverage and Margin - Read the Topics Below:
Leverage and Margin Described
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